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Google Inc. (NASDAQ:GOOG)

Morgan Stanley Technology, Media and Telecom Conference Call

March 05, 2014 3:00 PM ET

Executives

Jane Penner – Head of Investor Relations

Nikesh Arora – Senior Vice President and Chief Business Officer

Analysts

Scott W. Devitt – Morgan Stanley & Co. LLC

Jane Penner

Hi, everyone. I’m Jane Penner. I’m the Head of Google’s Investor Relations team. Before we begin, I would like to note that our comments and answers to questions may contain forward-looking statements regarding Google’s business outlook. Our actual results may differ from those made in any forward-looking statements due to a number of risk and uncertainties. These risks are detailed in our public filings with the SEC.

Also, please note that a webcast replay of this session will be available on our Investor Relations website in a few hours. We routinely post important information on our Investor Relations website located at investor.google.com. We encourage you to make use of this resource.

And with that, I’ll turn it over to Scott.

Scott W. Devitt – Morgan Stanley & Co. LLC

Thank you, Jane. Thank you. Very happy to have Nikesh Arora, with us today, carrying his Android around and…

Nikesh Arora

Yes, I have Android and I have a Nexus device. I’m going to take a selfie with Scott and see if he could out with Alan, but I don’t think it’s going to possible with this audience, so won’t take that job, that’s right.

Scott W. Devitt – Morgan Stanley & Co. LLC

Yes, I won’t touch on what we did earlier in the week, but yes, I don’t think we can break that record. So, let’s start with and I like your socks, those are nice. Those are – with click volumes as mobile has become a bigger component of the…

Nikesh Arora

Really rest of my thoughts to Click Fraud.

Scott W. Devitt – Morgan Stanley & Co. LLC

Click Frog, not Click Fraud.

Nikesh Arora

Yes.

Scott W. Devitt – Morgan Stanley & Co. LLC

Yes, click volume growth, we can talk about Click Fraud, if you want to, but as mobile has grown and Android has grown, click volume and the business has accelerated. You all have always talked about looking at the outcome in terms of volume and pricing, volumes accelerated to 30% 4Q is at a very strong, you do have geographic components that affect pricing as well. I think probably it looks like the story is just talking through the way that investor should think about volume and price and why it’s so important to focus on the outcome.

Nikesh Arora

Okay, I guess, if you think about the business, if you think about the transition. I think we are in a better place in the same amount of time on mobile than we were on desktop. And desktop grew at a certain pace, go to a certain place of monetization. I think we are much ahead of that curve with the mobile.

And if you look at consumer behavior, and some of you, I think most of you are here either on tablets or mobile devices, so consumer behavior has shifted very rapidly in favor of mobile vis-à-vis desktop. That’s a good thing, that’s what’s causing the volume growth and our volume growth continues to rise exponentially as more and more apps come on stream as more and more better experiences happen on the mobile web vis-à-vis the desktop.

It’s fair to say that monetization in mobile is not at par with desktop, if you read most industry reports have tell you monetization is somewhere between a third to half depending on the market you are in, depending on where you are. I think in the long-term, the mobile monetization is going to be a multiple of desktop monetization not a fraction. The reason I believe that is that you have so much more information and so many more signals when it comes to mobility, you understand where people are, you understand their social contacts, you understand their proximity to the business. They are going to transact with and so in this world we are constantly deluged with huge amounts of information the ability to take those filters and provide a much more cohesive, much more focused experience from a transaction and advertising point to view which generates revenue is much higher mobility than it is on desktop.

I don’t think all those experiences have been created, I don’t think all that data has been brought to bear to create that monetization opportunity, I think there is a point in time at this time mobile monetization becomes a multiple of desktop monetization and actually I believe it defines which companies end up being winners or not?

Scott W. Devitt – Morgan Stanley & Co. LLC

On that topic, I think on the fourth quarter call, it was discussed about efforts in combining user in advertiser provided location data to make local more relevant, there is several companies that exist in the market that specifically are focused on local. Local is obviously a way to improve monetization in mobile, can you talk about Google’s efforts in that area and things you may see over the next coming quarters and years.

Nikesh Arora

Yes, I think look, the desktop world took the world of advertisers from I would say, tens of thousands to a few million, so traditionally advertising was restricted to about 20,000 companies around the world, everybody else was primarily the only way other form of advertising was in yellow pages or in circulars that came to your home. The online web that’s the world took that number from 30,000 to a few million.

I think as we go forward that few million becomes tens of million as mobility become more relevant, local advertising becomes more relevant. I think we instead of fighting this opportunity in a way we are trying to figure out how to create a simple model where small businesses around the world feel compelled to spend money in the mobile space, because it creates a direct ROI for them as in terms of people walking into the door or more volume coming there.

I think it needs to be a very simple offering, it needs to be very compelling at least to be something there is the direct benefit or impact, it is happening for a few million advertisers, I don’t think it’s happening for tens of millions of advertisers, I think it will as we figure out these experiences that bring dealer to bear to provide those services.

Scott W. Devitt – Morgan Stanley & Co. LLC

And how do you think about this fits local and then broader as well, but if you look at local initiatives like the Carousel efforts that you launched more recently with local content. Initiatives that you put forth and including M&A and travel, things like PLA and shopping, how do you think about this concept is going deeper into the funnel, just philosophically as a company in terms of ultimately over time being more engaged and involved at the transaction level versus actually just being more relevant to those that actually produce transactions and getting paid for better leads?

Nikesh Arora

Okay, well I think let’s step back, I think if we look at consumer behavior, why do people come to the web, why do people search? Right, people search because there is more information being created everyday, more and more information they get, its like 5 exabytes created every three days where since the beginning of mankind, it was 5 exabytes until 2004. So, there is a huge amount of information out there that we are dealing with constantly. So people want to go out there and parse through that information, find the answer what they are looking for,

Now that’s what Google started of doing, that’s what we still aspire to do, is get to the information before even you know you need it right, so in that context we did a great job of helping you navigate the web and find the answer and tender links and that allowed us an opportunity for advertising.

Over time because your behavior has changed it has gone from up looking for websites to looking for precise answers, if I typed the name of a restaurant, I expect to know what it is? I expect to get a map. I expect to get the menu, I expect to get the ability to make a reservation, and same thing in products, if I go search for product and I want the ability to be able to transacted by and get it to my house, so people needs for how they consume information is changing over time.

That’s one thing in the side. If you take that and say what is the typical journey if somebody follows, they go to the journey and explore, declaring intent and transact. So first I spent a lot of time browsing, exploring, then I go declare intent and I transact.

Now, what’s interesting is mobile devices by virtue of the real estate in the screen and the image you see actually skip a lot of the explored part. They go directly to declaring intent. People are more précising their queries in mobile devices where they search for specific product, they search for specific restaurants, they search for specific flight fares, because they’re actually looking for a quick answer as opposed to sit there and browse on websites to get the answers.

So, our efforts around PLA, our efforts around travel are about actually giving you a much more precise answer as opposed to sending you to a website we have to go through the explore process and keep looking for what you’re looking for. So I think that’s a big shift we’re going to keep seeing in the industry where people are looking for more precise answers, and we’re going to have to work hard and trying to get them those precise answers and anticipate their needs and provide the answers to them.

Now, how we take that declaring intent to transaction is the next question. How do we go from there because I think they’re great. Now you found the information, let me help you transact. That’s becomes a lot more interesting in mobile devices where people struggled with putting their payment credentials in one place in the web and getting every result some.

People are getting more and more comfortable having a set of payment credentials associated with their device that allows them to buy across their device. Because the device is more personal, it belongs to me as opposed to my family. It’s not in my office. I feel more comfortable that – I mean, most of us in the room are actually logged into our devices all the time whether you have an iPhone, have Android device, you’re actually logged into device all the time. You pretty much do everything logged in. Your payment credential does associate with it.

So to challenge their opportunities how do you take that that set of sort of table stake and you create the opportunity to make it, I think less – sort of more and more frictionless where it comes to buying products or comes to buying travel flight fares or it comes to buying anything whether it’s purchased in the app or buying digital content, and aside to this, not related to transactions, but providing better information to consumers. I was recently on a Nexus 7 device, so of course on the Android operating system.

Looking at flight information, in terms of, is the flight going to be on time, logged into my Google account obviously. Five members of my family when I take the crew into Google actually showed the means of the passenger and the seat numbers and I have no idea how you pull that off in the Google…

Scott W. Devitt – Morgan Stanley & Co. LLC

Does that freak you out? Were you happy?

Nikesh Arora

Both. Freak me out and…

Scott W. Devitt – Morgan Stanley & Co. LLC

And you’re getting happy.

Nikesh Arora

And then I was happy.

Scott W. Devitt – Morgan Stanley & Co. LLC

Right. I was going to as opposed to you made me happy than you freak me out.

Nikesh Arora

Yes.

Scott W. Devitt – Morgan Stanley & Co. LLC

The end stage is a better – that’s the anecdotal out of the hundreds of millions of people, my unique experience. So as it relates to things like Google Now and battery information, not necessarily transaction level information, can you talk a bit about that and what you’re doing and how Android plays a role in that because I assume if I was using an Apple device that may not have gotten those…

Nikesh Arora

Actually you would. Well, you may have not gotten – yes, you would. Google Now is available in Apple device as well, although it’s harder to get it on there than it is on Android devices. I think if you think about it, we came from a world where Google was a company where you didn’t have to log in to get your services for Google Search. You could type your search in a search box and you got the answer and you went away. There is a generation of companies that came after where the entire value of proposition was based on knowing who you are.

While you cannot buy something on Amazon, let’s say who you are or you cannot go, figure out your social circle unless you are logged into social networking side of choice. So, we came from roots where we were anonymous and then we realized that you were using seven different services on Google and you could be seven different people all the same person, we wouldn’t know.

This kind was the bad user experience and a bad outcome because you are using seven different Google services. So we have to spend a lot of effort in trying to align and integrate these different perspectives and see, are you the same person who was in YouTube, is using Gmail, is on Google. So I think the last two or three years of effort are eventually bearing fruit. We actually understand our users much better, and as we understand users much better our aspiration is to provide services or things for you in a seamless fashion. So it’s something which is on Google Now.

It understands who you are, it understands that your family members are on a particular flight, when you do a search, we get the reason you’re searching for that particular fight, is because we know that your family members are on the flight, so let’s see all the information we can find that sort of zeroes in on the answer you might be looking for. So I’m flying at 7’oclock, my phone is already telling me that your flight is late by 30 minutes. It knows that. Now that’s tremendous amounts of convenience. I’m happy with that convenience, if I got freaked out, I could turn that off.

So I think you will see more and more efforts on our part to organize information and trying to anticipate your need in a mobile device, because mobile devices lend themselves less to exploration and more towards intent.

Scott W. Devitt – Morgan Stanley & Co. LLC

Shifting gears a little bit, we’ve recently noticed some brand banner ads in connection with the queries particularly Southwest Airlines and a few others. I was wondering if you can just talk about your brand efforts within search results and otherwise and whether there will be some newer formats announced throughout the year?

Nikesh Arora

I think brand broadly speaking is a big focus for us. If you look at the advertising industry, by different counts about a $1 trillion spend and above the line and below the line advertising around the world. It’s roughly give or take about 100 plus billion spend in the digital realm and the rest of it is still spend in the traditional offline sense. I think it is fair to say that a lot of the shift of advertising from $1 trillion towards digital has been in area we call performance i.e. I want more clicks on my website, I want more people in my store, hence people say I can do that much more efficiently in the digital world than I can do it in the traditional world. That’s work out.

In the past few years, we’ve been trying to convince brand advertisers that, look you can actually build a brand on the Internet as well because there is a huge segment of the population from the ages of 16 to 30, which spends more time on the web than they do in traditional forms of media. So if you want to target that segment, you’re better off spending time, spending your money where that audience is.

So I think that sort of have sunk in. The challenge has been that trying to convince advertisers to create campaigns that are digital only is hard because they have been doing this for 20, 30 years. They understand how to do it. You have a Dove soap ad it’s much easier to design a TV ad, make people match it than a design an online experience.

So we’ve been able to get a lot of what I call, brand extension spend, where they have designed the campaign for television and they want to add more online viewers to it, they come and give us some money, get online inventory from us.

But what we have to spend more time working on is convincing very large brands that they should design a campaign with digital first in their minds. Towards that end we just hired a gentlemen from Procter & Gamble called Kirk Perry, in the family care business, $6 billion business. He’s been doing brand for 25 years, he is building a team. The good news is that roughly 80% of the world’s brand spend is concentrated around 850 companies.

So either to go find some fraction of those companies and convince them, they should think digital first and Procter & Gamble spends $5 billion in advertising, they spend few hundred million dollars on online advertising. There was a way to convince them that a lot of that $5 billion would be much better spend, if they started to do digital first, we get some of those big players to start moving in that both direction. Hopefully over time we will start creating a better balance between the amount of money spend offline versus online.

Scott W. Devitt – Morgan Stanley & Co. LLC

And brand can obviously be benefited from video advertising over time.

Nikesh Arora

You can see the whole television paradigm is changing anyway, when Netflix [indiscernible] he was there, he will be here, when they launch House of Cards all the episodes in one day and he start consuming the way you want to consume it, it changed the paradigm of all the advertisers against those there is nothing over on the long-term there will nothing be called prime time television at 9 pm in the evening, because why should I have to sit in front of my TV and in particular nice evening and watch it for a particular half an hour or an hour, when I could start whenever want and end whenever I want.

Scott W. Devitt – Morgan Stanley & Co. LLC

You were quoted, so may have misquoted but quoted something of the extend of that over the next five years as much as $300 billion of incremental spend could come on online and the advertising market and that video would be the bigger driver and also one.

Nikesh Arora

I want to keep saying that’s for the next five years.

Scott W. Devitt – Morgan Stanley & Co. LLC

You got $300 billion incremental.

Nikesh Arora

I’ll keep saying that for the next 5 years.

Scott W. Devitt – Morgan Stanley & Co. LLC

Five years every year, so let’s assume five years from today one kind of talk a little bit about your view there in terms of that’s a big number and two, why and why is video is so imminent now in terms of driver?

Nikesh Arora

I think it have to do with look at the end of the day in the world Thompson gets monetited either by subscription or by advertising, all the way from news papers to magazines to televisions to HBO to cable either you have to pay a big amount of money to subscribe or you watch free to air TV with ads in them or usually a hybrid of those. Now you’ve seen that and that’s how you get $7 billion to $700 billion to $1 trillion being spend in that industry.

What has happened is consumer viewership patterns are changing tremendously right, a lot of us are watching video more and more in online means or more and more in ways that is non-linear. So when people shift the advertisers start to figure out that’s where the audience is, they have to shift there.

There is a lot of stickiness and inertia in the current system because people have been doing it for 30 years, that’s how they spend their money, that’s how they spend their grand dollars. But as more and more audience shift you all going to have to follow the audience.

I think that was in the UK until 2005 there were 16 programs, which have audiences over 15 million and then become one because the fragmentation continues to increase and large television programming.

So with that happening advertisers that are going to want to spend more and more of their money trying to buy audiences, and the best place to buy audience is actually is the online world. There are billion people watching YouTube and most of the younger population watching it there, if you want to target $50 million, 18–35 year olds, the place to buy that in bulk is that audience is in this online world, less so in the physical and the television world.

So I think part of it is the journey we have to go through with large advertisers making them understand the relative value proposition, working with people like comScore and Nielsen, they can prove with meg rates that you are spend in television is no different than your spend in online or vice versa, so a lot of those building blocking are coming into place, a lot people are marching towards that and I think as we start getting some of the bigger brands to spend more and more money from traditional media towards online you will see that they can interchange.

Scott W. Devitt – Morgan Stanley & Co. LLC

And expand a little bit on the you mentioned comScore, you mentioned Nielsen. There was a point in time were it seen like you are going about it on your own and measurement seems to be important and with such what, with buyers seemed to suggest and you’ve seen to be more open about, relationships that will allow third-party measurement, can you talk about that?

Nikesh Arora

Yes, I think what happens when we started doing this in 2006 we think as we move to the online world the current metrics or perhaps not the only metric that you should be measuring effectiveness on. For example in today’s world you put an ad campaign say, I want to 18 to 30 year old 20-40 years old on television and then six months you got reports saying by the way your campaign ran, but you only got 80% effectiveness because your daughter watched, your dad watched but they didn’t fit the segment, so there is wastage in television advertising, as 20% of the people is probably going to watch over different people, so you get a little bit of true up, you get some money back, because you only, got 80% of the audience. And the online world, that’s not when happens, you buy the audience if I know that the person is about watch it, is 18 years old I will not serve the ad.

So, I already know this person is 18 year old, so I won’t serve the ad. So in a way, in concept you could have 100%efficiency in the online world, because you will never serve what we call a “bad impression”. Now that is a different way of measuring it, but that is not the way measurement is done today. But that became too complicated for us to go, sell and explain, because we ever we thought were selling our own book. Google is talking about this metric, because that is how Google wants us to think about it.

Switching away, well this show you how it works. But the traditional measurement you realize that you’re getting much more efficiency than the online world. And I think our realization is that the market wants a third-party unbiased metric that tells them how our advertising media compares with other media. So, that is why we think it’s fair then, we can work with comScore and Nielsen for them to show that once we get the market to the point where they understand that this is much more efficient and much more useful, hopefully we can work with the same guys come with the next set of metrics for the online trade.

Scott W. Devitt – Morgan Stanley & Co. LLC

Are there any sets of advertisers size wise or other ways to segment them that are YouTube is better suited for over the long-term or do you think it broadens out over time in terms of the perception today relative to what you think will capture in the long run.

Nikesh Arora

I think online is particularly good for younger audiences, as we have discovered, no offense people in the room. But this is not your target audience for online advertising. This is in certain programming, on YouTube you get a lot of – the entire – our sweet spot is 18 to 34 around the world.

There are other places where you can get up to 40-45 years of age, then the market starts to shrink in terms of audiences. That is one. The other is the online world is very good for burst and reach advertising, if you’re launching a movie. You want to get a lot of people to watch the movie. You want to have a lot of reach, you want to get everybody in the world at the same time.

You can go online, you can get 100 million people to watch the trailer you ad. It’s harder to do that in traditional mechanisms, because we have to go cut deals with different television stations, different media and it has got look like a big sort of burst. Those things are pretty much where you’ll see earlier adopters and we already see that. CPG is a big space, because it has spent a lot of money as an industry.

You can pretty much add the CPG advertising budget and take 10% to 15% that is roughly the amount of money they will spend in advertising.

Scott W. Devitt – Morgan Stanley & Co. LLC

As our Android continue to be successful Google Play has benefited significantly and it has shown up I think in your other revenue line in the fourth quarter was up 100% and a lot of that was Google Play and hardware sales. I wondered, if you can share the economics in terms of the way that Google Play works in terms of on a net basis, how much is being kept by Google versus shared with partners and carriers.

Nikesh Arora

I think I am not going to debate, I am not going to work down the spread sheet. But roughly speaking on Google Play anybody who has content or apps on Google Play, get the sizable amount of revenue like you would do in any online digital store, also remaining revenues some part of that goes towards clearing the transaction depending on the payment mechanism.

Some part of that is kept by us and some part of that is shared in case it is a distribution deal which allows us to get more distribution of the Play Store. So there maybe four people, or two people sharing the revenue for every dollar that is spent in Google Play.

Scott W. Devitt – Morgan Stanley & Co. LLC

Okay. I want to leave about 10 minutes for questions, but I had a couple of more from me and we will turn it over. Android has been an enormous success and Gartner estimated that Android will reach 1.1 billion users in 2014, which is up 26% from 2013. Obviously Google Play is one way to monetize that mobile search is another. There seem to be a lot of other ways to monetize Android over time. And that is why I wondered if you care at this, speculate or share with any other message that you plan to monetize Android over time?

Nikesh Arora

What release is that?

Scott W. Devitt – Morgan Stanley & Co. LLC

There is a plenty of messaging companies in Asia. I’ve heard a lot about those recently.

Nikesh Arora

So you think it’s a good idea like what it’s $500 million per employee. Is that a good use of our money?

Scott W. Devitt – Morgan Stanley & Co. LLC

I’m not good with math.

Nikesh Arora

These guys are our investors. So I’m happy to take advice and go back to our CFO and CEO and share. Are you recommending we buy it from Asian mobile messaging?

Scott W. Devitt – Morgan Stanley & Co. LLC

I’m not sure you want to take my recommendations, but…

Nikesh Arora

I didn’t say. Well, I was asking for your recommendation.

Scott W. Devitt – Morgan Stanley & Co. LLC

So nothing that you’d like to share in that area right now.

Nikesh Arora

All right. If you were planning to buy something I shouldn’t tell you, but how do we get this right? If you want to know about how to monetize [indiscernible].

Scott W. Devitt – Morgan Stanley & Co. LLC

Yes, Android outside of safe play and search and what else can you do?

Nikesh Arora

I mean, look, in the history of operating systems, I think Android has been the quickest and most successful adoption of an operating system in the world. So you just sort of stop, take pause and say, oh my God, that’s crazy. Nobody could have ever predicted that we’re going to get an operating system adopted in an industry, which has so many different OEMs, manufacturing with their own operating systems having adopted around the world.

So I think it’s got us by surprise as much as it got everybody else by surprise, but it’s a happy surprise. Surprises are better than shocks. So it’s a good thing. I think part of now we’re going to make sense. So how do we make sure that we get a good experience for all of our Android users around the world, and I think part of the development you’re seeing in subsequent releases of Android operating system is how it tries to make it better, easier and nicer for users to use the services.

At Google, this is my 10th year at Google, and we’ve never started a conversation at Google on how we’re going to make money from this. The conversation always starts it’s how do we solve the user problem, how do we make sure we are not building this to compete with somebody else, instead trying to leapfrog what we’re providing as a solution for the end user.

So the speculation actually never happens at how to make money. The speculation always happens is what if this thing would just jump out of your pocket every time you make a phone call and just comes, stick itself in your hand and anticipate you’re going to call and just dial the number for you, right. That’s the kind of stuff we talk about. We don’t talk like, maybe we would charge $0.10 a call in that case and we’ll make a lot more money. Now that’s what I would think because I’d like to make more money, because it’s what I get to do for living, but that’s not the conversation. We don’t spend time thinking about how we’re going to do that.

Our view is that if you got 1 billion people to use something and if you are making $1 from each of those people that’s much better than getting 10 million people using and getting $10 from those. So you want to make sure that there is ubiquitous use of our services and as it happens, we can figure out more interesting ways of monetizing that.

Now, we have the luxury of being able to do that now, because of the way the company has evolved, we have grown. I think we’re going to keep it that way. So I don’t know if there are more ways to make money on Android, but that’s not the way we think about it. I think Google Play is doing well. I think it’s monetizing, like you said – mobile search is helping in monetizing. I think things like YouTube, things like various other Google apps will constantly provide more opportunities to monetize. And the fact that we can create a beautiful Google experience, because we understand how Android works. It’s way more valuable than just trying to figure out to make money from Android.

Scott W. Devitt – Morgan Stanley & Co. LLC

Okay. Last one from me. The e-commerce, it’s a big piece of the advertizing business that you look at even physical goods alone, but incorporating travel. There’s different views when you look at the market globally. In markets like China it’s suggested on the commerce side that there’s platform capabilities that makes search less relevant as it relates to e-commerce in many other parts of the world, maybe all. Google Search is a much more integral component of the e-commerce process, but also Amazon has gotten better and better in certain markets in terms of becoming a vertical search provider if you will. You’ve launched PLAs, Wallet and other initiatives. How do you think about the retail market, the differences globally and then the positioning of Google relative to those that are taking these vertical approaches to displace your model?

Nikesh Arora

Okay. So I’m trying to parse you question. Your question is e-commerce, as a threat to search or e-commerce as a successful business on its own.

Scott W. Devitt - Morgan Stanley & Co. LLC

Take both if you want, but I was asking the first.

Nikesh Arora

The first, okay, because I think generally looking at the P&L, I feel happier with the margins than a search business than I feel on an e-commerce business. But having said that, I’m sure everybody here would rather be in the search business and doing more and more search business than just e-commerce. I am sure that it goes back to a few points. I think one is even now despite all the conversation around e-commerce, roughly 8% to 10% was – commerce has done digitally, meaning 90% is still done offline. It’s still out there.

So as we’re seeing rapid rise in the e-commerce’s business around the world because from zero to 10% in a short period of time is a good business and we can be in it. But there’s still 90% of the opportunity out there, which has not been enabled.

And I think it’s fair to assume that in the next decade everyone of those 90% of the businesses will have more technology and better than them and some part of that process is going to be enabled by technology, whether it’s just the discovery process, product or service, which says it’s available on online store. It’s available a mile away from here, it’s available on your way home, it’s available next to your house, and available next to your work. So just getting a sense of where I can get what I need to get is going to become more and more prevalent, right.

There is so many times we walk into a store, you can find your size isn’t there, or the stuff you’re looking for is not in-stock. Those are inefficient things in our lives and all of us here like efficiency presumably and those inefficiencies will vanish and they will be enabled by technology. That’s the most basic form. You go from there and well, if I can find it and I know exactly what I want, why do I have to go there and browse, like just buy it. That’s the next step. Then if I buy it I probably could just get it fulfilled, get it shipped to my house.

So there are different steps and different points of integration in the entire e-commerce process. The commerce process is not called the e-commerce process and the question is, is that a close model where I have to go to one place, search it, buy it and get it delivered or is there more of an Android like open ecosystem where I can search for it, I can find it, I can find a mechanism to buy it, I can find a mechanism to have it delivered.

So I think the things you’ve talked about which you’ve done actually have addressed different parts of that chain. The PLA is part of the discovery process. This is how can you find a product much more simpler, much more simpler, find out in different stock, find if it is near you or not.

If you look at the buying process, we haven’t done as good a job as we should have, but I think we’re focusing more on mobile and most recently, a few months ago I think last year we launched an InstaBuy API on an e-mobile app on your phone if they do the integration of the back.

So if you’re logged into your Android phone, which you almost always are, you have your payment credentials in Google Play store. You have the ability to buy something on app. You should be able to make that transaction happen. Now, is it everywhere we wanted to be? No, but it is the second most prevalent payment platform on the wallet, Google Wallet is despite people believing that it’s not succeeded yet.

The third part is the fulfillment part, which is more complicated, harder to do. So we’re still evaluating Google Shopping Express part to see how we can get into the fulfillment business, but it may very well be that there will be multiple players doing fulfillment and then you could bring in your own stack.

I explore here, I buy there and I get it fulfilled here as opposed to a close model this is, I have to explore, I it after full fill which is a much more elegant experience, but over time close systems lose to open eco-systems and I’m not suggesting that which way you perform that the current leaders in e-commerce they are not going to figure out, at least what I’m saying is you get certain things with an open system, you don’t get certain in the close system, it’s a matter of execution.

Scott W. Devitt - Morgan Stanley & Co. LLC

That’s helpful. We have bought 5 minutes for a couple of question just wait for the micro phone back.

Question-and-Answer Session

Unidentified Analyst

I just wanted to go back to YouTube for a minute, can you just bring this up today how many people domestically and around the world are on YouTube everyday. How much time do they spend on YouTube everyday and could you ought to improve or do you plan on improving the rate of usage growth by putting in or allowing for professionally produced content?

Nikesh Arora

I don’t have the precise numbers. I don’t know it’s a lot of people that spend a lot of time. So that’s not good an answer for us for a numerically oriented audience, but I’m sure my colleague who are here can help you answer that precise number.

Your second question related to the plans for professionally generated content on YouTube? I think it is fair to say we believe that YouTube is now the established platform for short form video and if there is a short film video you want to watch people come to YouTube, they expect to find it there they find it there and even short form clips of long form videos are found.

So something interesting happened to the Oscars, people will find a clip, something interesting happened in Wimbledon they will find the clip unlikely they find the whole proceeding in YouTube but likely we find that clip of interest. So we feel comfortable that, that is happened, they are also feel comfortable there is a whole amount of user generated content which people have created and through serendipity people become famous and they virally succeed.

To be fair what we haven’t figured out is how to take something and make a start off of it. So we haven’t figured out how on television if you get that prime time slot at 9’oclock you can take a TV ballet and make 10 million people watch it because they have a way of doing that. They have a way of advertising in different places, getting us to watch it in particular point of time, and so look now this property is worth $100 million.

We don’t do that in YouTube. We haven’t figured it out. I think some signs of struggle is that what we want to do, because part of the whole value for us on YouTube is that we don’t push a particular piece of content to try and make it more better than the other, we actually allow people to go figure out what they want. So that’s our religious dilemma on YouTube vis-à-vis trying to make stars out of content that’s already on there.

Your second part which is related towards premium content in terms there is an assertion or implication and there that if we had more premium content we probably might be able to monetize it better or get more people to watch it for longer period of time. We haven’t concluded that that’s true in our minds because there are used cases out there which I’m sure you heard from Netflix. They can have a business on professional content which is without having a user generating content business which is perfectly fine and we seem to have a perfectly fine user generated content business, which works without professional content.

If you take the world in the context of advertising the second religious dilemma we have or I have is that is for the longest of time when we bought advertising in television, we brought brand affinity and over paid for it. So I want to have an ad in the middle of Super Bowl, the same amount of audience can be captured across five programs on TV for half the price of a Super Bowl ad, but I want to associate with the Super Bowl because I want the brand infinity, I want to be in the middle of it. I want to be in the half time – sort of right before the half time show, that’s the most expensive slot because I want my brand to be associated that I’m cool, I’m big and I’m in the Super Bowl ad. So we will pay for it.

Now the reason we did that is because that was the only metric that advertisers had to understand the sort of this brand affinity notion that I want to be associated with this, my brand is cool, I am there. It wasn’t based on the audience I wanted to buy. The web is slightly different. In the web we can sell aggregated audiences, which is what advertisers are trying to do. They brought brand affinity, because that’s the only way to understand who the audience segment is.

On the web we can actually give you a much better segmentation. So the part we are struggling is do you need a big brand on the web to be able to sell premium advertising or can I sell a lot of clean audience data in an intelligent way and say here is a set of people who are between 25 and 35, they all make a half a million dollar reach. And you should be advertising to them, because I found 10 million of those. We think in the long-term that’s more valuable than being able to advertise on an admin or you pick your favorite soap.

So that’s a bit of a – that will be proven over time. So that is – those are the two religious dilemmas we have vis-à-vis advertising on YouTube and professional content.

Scott W. Devitt - Morgan Stanley & Co. LLC

And we’ll need to stop it there, I am sorry just because of time. Nikesh, thanks a lot for coming. I appreciate it, thank you.

Nikesh Arora

Thank you, very much. Thank you.

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